Federal Trade Commission, et al. v. Advocate Health Care Network, et al.

76 Pages·2016·0.93 MB·English

by  Federal Trade Commission

Case: 16-2492 Document: 40 Filed: 07/15/2016 Pages: 76

No. 16-2492

IN THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
–––––––––––––––––––––––––––––––––––––––––––––
FEDERAL TRADE COMMISSION et al.,
Plaintiffs-Appellants,
v.
ADVOCATE HEALTH CARE NETWORK et al.,
Defendants-Appellees.
–––––––––––––––––––––––––––––––––––––––––––––
On Appeal from the United States District Court
for the Northern District of Illinois
No. 1:15-cv-11473
Hon. Jorge L. Alonso
–––––––––––––––––––––––––––––––––––––––––––––
BRIEF AND REQUIRED SHORT APPENDIX OF APPELLANTS
FEDERAL TRADE COMMISSION AND STATE OF ILLINOIS
(PUBLIC VERSION)
–––––––––––––––––––––––––––––––––––––––––––––
LISA MADIGAN DAVID C. SHONKA
Attorney General Acting General Counsel
CAROLYN E. SHAPIRO JOEL MARCUS
Solicitor General Director of Litigation
BRETT E. LEGNER MATTHEW M. HOFFMAN
Deputy Solicitor General Attorney
ROBERT W. PRATT FEDERAL TRADE COMMISSION
Chief, Antitrust Bureau 600 Pennsylvania Avenue, N.W.
Washington, DC 20580
OFFICE OF THE ILLINOIS ATTORNEY
[phone]
GENERAL

100 W. Randolph St.
(Additional counsel listed on signature
Chicago, IL 60601
page)
[phone]
Case: 16-2492 Document: 40 Filed: 07/15/2016 Pages: 76

TABLE OF CONTENTS
TABLE OF CONTENTS ................................................................................................. i
TABLE OF AUTHORITIES ......................................................................................... iii
JURISDICTIONAL STATEMENT ............................................................................... 1
STATEMENT OF THE ISSUES ................................................................................... 2
STATEMENT OF THE CASE ....................................................................................... 4
A. The Parties And The Merger ............................................................................ 4
B. Economics Of Commercial Hospital Markets .................................................. 6
1. Prices for inpatient services are determined in negotiations
between hospitals and insurers based on each side’s
bargaining leverage. ................................................................................... 8
2. Insurers need to include local hospitals in their networks to
successfully market health plans to employers. ....................................... 9
C. The Government’s Analysis Of The Relevant Market ................................... 13
1. Dr. Tenn’s application of the hypothetical monopolist test .................... 14
2. Market shares and concentration in the relevant market ...................... 17
3. Robustness checks to candidate market .................................................. 19
4. Effects of the merger on hospital prices .................................................. 19
D. Defendants’ Analysis ....................................................................................... 20
E. The District Court Opinion ............................................................................. 20
F. Injunction Pending Appeal ............................................................................. 22
SUMMARY OF ARGUMENT ..................................................................................... 23
STANDARD OF REVIEW ........................................................................................... 26
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ARGUMENT ................................................................................................................ 27
I. The District Court Failed To Properly Formulate And Apply
Any Test For Determining A Relevant Geographic Market ......................... 28
A. The District Court Erred In Failing To Consider Whether
The Government’s Proposed Market Passed The
Hypothetical Monopolist Test. ................................................................. 29
B. The District Court Erred In Holding That Destination
Hospitals And Other Hospitals Used By Some North Shore
Area Residents Must Be Included In The Relevant Market. ................. 34
C. The District Court Erred By Relying On Evidence Of
Competition In The Outpatient Services Market To
Determine The Geographic Market For Inpatient Services. .................. 38
II. The Court Clearly Erred In Rejecting Overwhelming Evidence
That Patients Require Access To Local Hospitals And That
Insurers Cannot Market A Plan That Does Not Include Local
Hospital Options. ............................................................................................ 42
A. The Evidence That Patients Require Access To Local
Hospitals Is Overwhelming And Undisputed. ........................................ 43
B. Diversion Ratios Do Not Undermine The Overwhelming
Evidence That Insurers Cannot Market A Plan In The
North Shore Area That Excludes Local Hospitals. ................................. 47
CONCLUSION ............................................................................................................. 52
CERTIFICATE OF COMPLIANCE ............................................................................ 54
CERTIFICATE OF SERVICE ..................................................................................... 54
CIRCUIT RULE 30(d) STATEMENT ......................................................................... 54
ADDENDUM: MAP OF NORTH SHORE AREA AND SURROUNDING
HOSPITALS
REQUIRED SHORT APPENDIX

ii
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TABLE OF AUTHORITIES
CASES
AD/SAT v. Associated Press, 181 F.3d 216 (2d Cir. 1999) ........................................ 31
Anderson v. Bessemer City, 470 U.S. 564 (1985) ........................................................ 27
Ball Mem. Hosp., Inc. v. Mut. Hosp. Ins., Inc., 784 F.2d
1325 (7th Cir. 1986) ................................................................................................... 8
Bose Corp. v. Consumers Union, 466 U.S. 485 (1984) ................................................ 26
Brown Shoe Co. v. United States, 370 U.S. 294 (1962) ...................................... passim
Coastal Fuels Inc. v. Caribbean Petroleum Corp., 79 F.3d
182 (1st Cir. 1996) ................................................................................................... 31
Cox v. City of Chicago, 868 F.2d 217 (7th Cir. 1989) .................................................. 26
Food Lion, LLC v. Dean Foods Co. (In re Se. Milk
Antitrust Litig.), 739 F.3d 262 (6th Cir. 2014) ........................................... 30, 31, 34
FTC v. Elders Grain, Inc., 868 F.2d 901 (7th Cir. 1989) ...................................... 27, 29
FTC v. H.J. Heinz Co., 246 F.3d 708 (D.C. Cir. 2001) ................................................ 27
FTC v. Staples, Inc., 2016 WL 2899222 (D.D.C. May 17,
2016) ......................................................................................................................... 40
FTC v. Whole Foods Market, Inc., 548 F.3d 1028 (D.C. Cir.
2008) ......................................................................................................................... 31
H.J., Inc. v. Int’l Tel. & Tel. Corp., 867 F.2d 1531 (8th Cir.
1989) ......................................................................................................................... 31
Hospital Corp. of America v. FTC, 807 F.2d 1381 (7th Cir.
1986) ......................................................................................................................... 31
In re Evanston N.W. Healthcare Corp., 144 F.T.C. 1 (2007) ................................ 40, 51
Inwood Labs, Inc. v. Ives Labs., Inc., 456 U.S. 844 (1982) ......................................... 26
Israel Travel Advisory Serv. v. Israel Identity Tours, 61
F.3d 1250 (7th Cir. 1995)......................................................................................... 31
iii
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Lawson Prods., Inc. v. Avnet, Inc., 782 F.2d 1429 (7th Cir.
1986) ......................................................................................................................... 26
Menasha Corp. v. News Am. Mktg. In-Store Servs., Inc.,
354 F.3d 661 (7th Cir. 2004) .................................................................................... 32
Moriarty v. Glueckert Funeral Home, Ltd., 155 F.3d 859
(7th Cir. 1998) .......................................................................................................... 26
ProMedica Health Sys., Inc. v. FTC, 749 F.3d 559 (6th
Cir. 2014) .......................................................................................................... passim
Pullman-Standard v. Swint, 456 U.S. 273 (1982) ...................................................... 26
See Reifert v. S. Cent. Wisc. MLS Corp., 450 F.3d 312 (7th
Cir. 2006) .................................................................................................................. 32
St. Alphonsus Med. Ctr.–Nampa, Inc. v. St. Luke's Health
Sys., 778 F.3d 775 (9th Cir. 2015) ................................................................... passim
Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320
(1961) ........................................................................................................................ 39
United States v. Conn. Nat'l Bank, 418 U.S. 656 (1974) ...................................... 29, 33
United States v. Engelhard Corp., 126 F.3d 1302 (11th
Cir. 1997) .................................................................................................................. 31
United States v. Household Finance Corp., 602 F.2d 1255
(7th Cir. 1979) .......................................................................................................... 28
United States v. Marine Bancorp., 418 U.S. 602, (1974) ............................................ 39
United States v. Philadelphia Nat’l Bank, 374 U.S. 321
(1963) ................................................................................................................ passim
United States v. Rockford Mem’l Corp., 898 F.2d 1278 (7th
Cir. 1990) .......................................................................................................... passim
STATUTES
15 U.S.C. § 18 ....................................................................................................... 1, 6, 27
15 U.S.C. § 26 ........................................................................................................... 1, 27
15 U.S.C. § 53(b) ...................................................................................................... 1, 27
iv
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28 U.S.C. § 1291 ............................................................................................................. 1
28 U.S.C. § 1292(a)(1) .................................................................................................... 1
28 U.S.C. § 1331 ............................................................................................................. 1
28 U.S.C. § 1337 ............................................................................................................. 1
28 U.S.C. § 1345 ............................................................................................................. 1
OTHER AUTHORITIES
IIB PHILLIP E. AREEDA & HERBERT HOVENKAMP,
ANTITRUST LAW (4th ed. 2014) ................................................................................. 30
Malcolm B. Coate & Jeffrey H. Fischer, A Practical Guide
to the Hypothetical Monopolist Test for Market
Definition, 4 J. COMPETITION L. & ECON. 1031 (2008) ............................................ 30
RICHARD A. POSNER, ANTITRUST LAW 156 (2d ed. 2001) ............................................. 30
U.S. Dep’t of Justice, Merger Guidelines (1982) ........................................................ 30
U.S. Dep’t of Justice & Federal Trade Comm’n, Horizontal
Merger Guidelines (1992) ........................................................................................ 30
U.S. Dep’t of Justice & Federal Trade Comm'n, Horizontal
Merger Guidelines (2010) ................................................................................ passim
Christine A. Varney, The 2010 Horizontal Merger
Guidelines: Evolution, Not Revolution, 77 ANTITRUST
L.J. 651 (2011) ......................................................................................................... 30
Gregory J. Werden, The 1982 Merger Guidelines and the
Ascent of the Hypothetical Monopolist Paradigm, 71
ANTITRUST L.J. 253 (2003) ....................................................................................... 30
v
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JURISDICTIONAL STATEMENT
The Federal Trade Commission brought this action under 15 U.S.C. § 53(b) to
preliminarily enjoin the proposed merger of Advocate Health Care Network and
Advocate Health and Hospitals Corporation (collectively, “Advocate”) with
NorthShore University HealthSystem (“NorthShore”) pending a decision by the
Commission as to whether the transaction violates Section 7 of the Clayton Act, 15
U.S.C. § 18. The State of Illinois sought the same relief under 15 U.S.C. § 26. See
ECF No. 18 (sealed complaint). The district court had jurisdiction under 28 U.S.C.
§§ 1331, 1337 and 1345. The district court issued an Order denying the motion for a
preliminary injunction (ECF No. 472) on June 14, 2016, explaining its reasoning in
a separate Memorandum Opinion and Order (ECF No. 473) that was filed under
seal. The FTC and Illinois (collectively, the “Government”) timely filed a notice of
appeal on June 15, 2016. ECF No. 474. The district court subsequently issued a
sealed Amended Memorandum Opinion and Order correcting two citation errors
noted by the parties, but making no substantive change, as well as a redacted public
version of that decision. ECF Nos. 484, 485. This Court has appellate jurisdiction
because the district court’s Order of June 14 was a final decision that disposed of all
claims in the case, 28 U.S.C. § 1291, and because the district court denied injunctive
relief, id. § 1292(a)(1).
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STATEMENT OF THE ISSUES
The Government contends that the proposed merger of Advocate and
NorthShore will enable them to raise prices for inpatient general acute care (“GAC”)
hospital services as a result of the combined entity’s increased market power. In
assessing whether a merger will unlawfully increase the combined firm’s market
power, a key question is the relevant geographic market—the area in which the
competitive effects of the merger should be analyzed. This case concerns the
definition of the relevant geographic market.
The Government used a standard analytical method known as the
“hypothetical monopolist test” to show that a group of 11 local hospitals in Chicago’s
northern suburbs constitutes a relevant geographic market. This test is set forth in
the Horizontal Merger Guidelines issued by the FTC and the Department of Justice
and has been endorsed by many courts—including the First, Second, Sixth, Eighth,
Ninth, Eleventh and District of Columbia Circuits—as a legally sufficient method of
defining relevant markets consistent with the Supreme Court’s holdings on market
definition in Brown Shoe Co. v. United States, 370 U.S. 294 (1962) and United
States v. Philadelphia Nat’l Bank, 374 U.S. 321 (1963). There is no dispute that if
the Government’s geographic market is correct, the proposed merger is
presumptively unlawful.
The district court ruled that the Government had not met its burden of
establishing a relevant geographic market. But it reached that conclusion without
ever assessing whether the Government’s proposed market satisfied the
2
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hypothetical monopolist test. Instead, the district court criticized the criteria the
Government used to identify a proposed market. In particular, it questioned the
Government’s decision to limit the market to local hospitals in the northern suburbs
and suggested that the market should also include hospitals outside that area,
including “destination” hospitals—academic medical centers in downtown Chicago
that provide highly sophisticated and specialized services and draw patients from
across the Chicago area and beyond. In reaching these conclusions, the court
rejected evidence that patients require local access for inpatient hospital services
and that insurers must therefore include local hospitals in their provider networks.
The questions presented are:
1. Did the district court fail as a matter of law to apply a legally sufficient
test for determining the relevant geographic market?
2. Did the district court clearly err in rejecting evidence that patients
require local access to inpatient hospital services and that insurers cannot
successfully market health plans in Chicago’s northern suburbs that do not include
local hospitals in their provider networks?

3
Case: 16-2492 Document: 40 Filed: 07/15/2016 Pages: 76

STATEMENT OF THE CASE
A. The Parties And The Merger
This case concerns the proposed merger of two large health systems that
operate hospitals in northern Cook and southern Lake Counties. Advocate is the
largest health system in Illinois, with 11 general acute care (“GAC”) hospitals,
approximately 70 or more outpatient facilities, over 5,000 employed and affiliated
1
physicians, and $5 billion in 2014 revenue. PX06000 ¶¶ 8, 13. It operates two
hospitals in the northern suburbs that are relevant to this case: Advocate Lutheran
General Hospital and Advocate Condell Medical Center. PX06000 ¶¶ 91-92.
NorthShore operates four hospitals, all located in the northern suburbs: Evanston
Hospital, Skokie Hospital, Glenbrook Hospital in northern Cook County and
Highland Park Hospital in southern Lake County. PX06000 ¶ 15.
The NorthShore hospitals are fierce competitors with Advocate’s Condell and
Lutheran General. A NorthShore strategic review concluded that “NorthShore and
Advocate are the #1 or #2 players in almost every service line,” and that Advocate
was NorthShore’s “#1 competitor” and “poses the greatest threat” in NorthShore’s
service area. Tr. 644-47, 649-50 (A119-22, 123-24); PX07010 at 013-14; PX07033 at
007, 037. Advocate’s CEO testified that Advocate and NorthShore were each other’s

1
Citations to “Tr__” refer to the hearing transcript. Parenthetical references in the form
(A__) refer to the Appellants’ separate Circuit Rule 30(b) Appendix, which includes the cited
pages of the transcript. Citations in the form “PX___,” “DX___ and “JX___” refer,
respectively, to plaintiffs’, defendants’ and joint hearing exhibits, which are in the record at
ECF Nos. 447 to 455. Citations to “Op.” refer to the district court’s Amended Memorandum
Opinion and Order (ECF No. 484),which appears in the appendix bound with this brief.
4